ITEM FOR FINANCE COMMITTEE

HEAD 177 - SUBVENTIONS: NON-DEPARTMENTAL PUBLIC BODIES
Subhead 955 Consumer Council
New item "Redemption of mortgage for Head Office premises"

Members are invited to approve a one-off grant of $39.2 million to the Consumer Council for redeeming the mortgage for its Head Office premises.

PROBLEM

We need to decide whether to make a one-off grant to the Consumer Council for it to redeem the mortgage for its Head Office premises. At the Finance Committee meeting on 27 February 1998, Members sought additional information on how the recurrent funding originally earmarked for meeting mortgage repayments would be deployed if Members agreed to the proposed redemption. The information is now set out in paragraphs 9 to 12 and the Enclosure of this paper.

PROPOSAL

2. We propose to make a one-off grant of $39.2 million to the Consumer Council (the Council) to enable it to redeem the mortgage for its Head Office premises. We intend to deploy the savings in recurrent subvention thus released to support an expanded programme of activities of the Council in furtherance of the interests of consumers.

JUSTIFICATION

Mortgage repayment

3. In August 1992, with the agreement of Government, the Council acquired its present Head Office premises in a commercial building in North Point at a cost of $46.9 million. This is financed by a 100% mortgage from a local bank. The mortgage agreement requires, among other things, the Council to repay the loan at an annual interest charged at 1.25% above the prime rate and in no more than 240 monthly instalments (i.e. up to August 2012).

4. In agreeing to the Council's proposal to buy rather than continue to lease office accommodation back in 1992, we accepted the Council's view that on a long term basis, it would be highly desirable and more economical for the Council to operate from self-owned accommodation. We have therefore agreed to allow the Council to use the original rental element in its recurrent subvention from Government, which would then not be required, for repaying the mortgage and to meet the Council's mortgage liability (under the terms set out in paragraph 3 above). We also agreed to make corresponding adjustments in the recurrent subvention, if needed, to meet fluctuations in the mortgage interest rate. In return, we have secured an undertaking from the Council not to sell, lease, assign, mortgage, charge or dispose of any part of the property to any other person without the prior written approval of Government. The Council is also obliged to unconditionally transfer the ownership of the property to Government if the Council ceases to occupy it. At the time of the agreement, the Council's loan was subject to a mortgage interest rate of 7.75% per annum. It was calculated that on that basis, the mortgage would be repaid in 180 instalments at a monthly payment of $441,446 or $5.3 million per year.

5. Since August 1992, the mortgage interest rate has been adjusted ten times on an upward trend. This has necessitated an extension of the repayment period while keeping the monthly payment unchanged. By December 1997, the repayment period had reached the limit of 240 monthly instalments. As a result, the Council has been paying more each month from its recurrent subvention since then.

6. By virtue of the understanding between Government and the Council, the Council informed us in December 1997 that Government would need to increase the recurrent subvention to the Council to meet the increased mortgage repayment requirement. We have reviewed the Council's mortgage liability. As at end February 1998, the Council had paid 66 instalments in mortgage repayment, totalling $29.2 million (including $21.5 million as interest charge and $7.7 million as repayment for the outstanding principal). At the prevailing interest rate of 11.5% per annum, the Council would still have to pay $41.5 million in interest charge and $39.2 million for the outstanding principal.

7. The options are for Government to top up the Council's recurrent subvention now, and as and when needed in future, to meet the increased monthly mortgage repayment under a maximum 240-month repayment period or to provide a one-off grant of $39.2 million to allow the Council to redeem the mortgage. To avoid fluctuations in Government's recurrent subvention to the Council, we prefer the latter approach. This then raises the question of whether we should correspondingly reduce the recurrent subvention to the Council by the extent of the mortgage repayment, that is, $5.3 million annually, or whether we should allow the Council to retain the funds for improving its services and activities.

Enhanced programme of activities

8. Even prior to the mortgage review, the Council has been requesting for additional subvention to cope with increasing public demands and to expand and improve its services. In January 1998, we invited the Council to spell out and prioritise its proposals. In the course of vetting these proposals, we identified a number of key activities which merited additional funding on a priority basis. We are content that, if Members approve the proposed redemption of the Head Office mortgage, the recurrent funding to be released, i.e. $5.3 million, would be put to good use by allowing the Council to deploy it on activities highest on this priority list. Details of these activities are set out in the following paragraphs.

9. In respect of promoting competition, the Council proposes to introduce a framework for codes of practices and encourage trade and professional associations to adopt these new codes to facilitate self-regulation of business, to monitor anti-competitive complaints in the market, and to take on new projects in specialised surveys on trade practices (for example, market and shoppers' behaviour, credit card agreements, and control of misleading advertisements). The Council will require two additional staff at a cost of $1.3 million per annum for this.

10. In respect of enhanced direct service to consumers, the Council proposes to set up a new Consumer Education Division, and to reorganise the Public Affairs and Complaints and Advice Divisions to better co-ordinate
consumer education activities. The Council also proposes to set up a centralised telephone hotline service centre at the Head Office to improve the efficiency with which its staff handles complaints and enquiries and to cope with the increasing demand from the public. This will replace existing arrangements whereby telephone complaints/enquiries are put through a hunting-line system to the Consumer Advice Centres in 16 districts. The Council estimates that these enhanced services will incur an additional cost of $1.3 million per annum, including the cost of an additional staff.

11. In respect of strengthening legal and policy research, the Council proposes to carry out more legal research on consumer issues, particularly in dealing with increasingly complex complaints and in product testing, and to initiate research with a view to developing a mechanism for better protection against consumer fraud and for better protection against misleading advertisements. The Council intends to strengthen the Legal Affairs Division by adding one legal affairs officer post at a cost of $0.8 million per annum.

12. In respect of projecting an independent and respectable corporate image, the Council considers that there is an urgent need to expand the Committee Secretariat to cope with the increased workload and to maintain a satisfactory standard of services for the Council. Between 1994-95 and 1997-98, the number of Council Committees has increased from nine to 13 (including, for instance, the Consumer Legal Action Fund Management Committee), and three ad hoc working groups have been set up (including, for instance, the working group on the definition of saleable floor area). These Committees are all served by non-remunerated Council and co-opted members; it is therefore essential for the members to be supported by an effective and efficient Secretariat. The Council also plans to strengthen contacts with the press and the media and to intensify co-operation with external consumer groups, including the Consumers International and relevant authorities in the Mainland of China (to deal with increased consumer complaints arising from closer links between the Mainland and Hong Kong). Accordingly, the Council proposes to create four new posts in the Committee Secretariat and the Public Affairs Division, at a cost of $1.9 million per annum, to cope with the work.

13. We support the Council's plan to enhance its programme of activities which will help to better protect and promote the interests of consumers. Accordingly, we propsoe to allow the Council to retain the recurrent subvention released from the redemption of the mortgage for its Head Office. A more detailed note on the existing funding arrangements, the 1998-99 budget of the Council with a breakdown on major functions, and the proposed enhanced activities is at the Enclosure.

FINANCIAL IMPLICATIONS

14. Subject to Members' approval, we will disburse the $39.2 million required by the Council in this financial year through supplementary provision under delegated authority to enable it to redeem the mortgage immediately.

15. Notwithstanding the redemption of the mortgage, the Council will continue to honour its undertaking in paragraph 4 above in respect of the use and disposal of the property and the transfer of ownership to Government if the Council ceases to occupy it.

BACKGROUND INFORMATION

16. The Council's Head Office occupies about 1 000 square metres and houses the bulk of the Council's staff. It has a conference room where the Council holds meetings and press conferences and a library which collects major consumer protection publications.

17. The title to the premises is vested with the Council, subject to the undertaking in paragraph 4 above. The Council is responsible for meeting all expenses other than the mortgage obligations, including rates, maintenance fees, claims and charges payable in respect of the property.

A Note on the Consumer Council

Funding

Government provides recurrent and capital subventions to the Consumer Council out of funds appropriated for the purpose by the legislature under Head 177 Subventions : Non-departmental public bodies. Although recurrent subvention to the Council, accounted for under a single expenditure Subhead 429, is not further classified into expenditure items in the Estimates of Expenditure, the Council is required, under section 15 of the Consumer Council Ordinance, to submit its annual estimates of income and expenditure and a programme of its proposed activities to Government for prior approval.

Recurrent subvention to the Council included in the 1998-99 draft Estimates of Expenditure amounts to $61,261,000. This includes $5.3 million for repayment of the mortgage for the Council's Head Office.